##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2005
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the transition period from to
 Commission
File Number: 000-50786
 STRATAGENE CORPORATION
  Delaware
(State or other jurisdiction of
incorporation or organization)
    
    33-0683641
(I.R.S. Employer
Identification No.)11011 North Torrey Pines Road, La Jolla, CA
(Address of principal executive offices)
    
    92037
(Zip Code)
 
 
 þ o
 o þ
  Class
    
    Outstanding at August 10, 2005Common Stock, $0.0001 Par Value
    
    22,149,917




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PagePart I. Financial InformationItem 1. Financial StatementsConsolidated Balance Sheets as of June 30, 2005 (unaudited) and December 31, 2004
    
    
    3Consolidated Income Statements for the Three and Six Months Ended June 30, 2005 (unaudited) and
2004 (unaudited)
    
    
    4Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2005 (unaudited) and
2004 (unaudited)
    
    
    5Notes to Unaudited Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    37Item 4. Controls and Procedures
    
    
    39Part II. Other Information
    
    
    40Item 1. Legal Proceedings
    
    
    40Item 4. Submission of Matters to a Vote of Security Holders
    
    
    40Item 6. Exhibits
    
    
    40Signatures
    
    
    41EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
   2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 ITEM I. FINANCIAL STATEMENTS
 STRATAGENE CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
 June 30,
    
    December 31,2005
    
    2004(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    5,611,166
    
    
    $
    4,890,458Marketable debt securities
    
    
    65,103
    
    
    
    197,125Cash  restricted related to bond indenture
    
    
    70,503
    
    
    
    582,995Accounts receivable, less allowance for doubtful
accounts and sales returns of $549,691 and
$766,772 at June 30, 2005 and December 31, 2004,
respectively
    
    
    11,722,601
    
    
    
    11,059,464Income taxes receivable
    
    
    
    
    
    
    269,861Inventories
    
    
    13,902,594
    
    
    
    12,986,910Deferred income tax assets
    
    
    1,958,159
    
    
    
    2,002,013Prepaid expenses and other current assets
    
    
    2,736,364
    
    
    
    1,713,729Total current assets
    
    
    36,066,490
    
    
    
    33,702,555Property and equipment, net
    
    
    11,644,682
    
    
    
    12,111,957Other assets
    
    
    564,207
    
    
    
    541,091Deferred income tax assets
    
    
    209,189
    
    
    
    217,102Goodwill
    
    
    27,234,214
    
    
    
    27,234,214Intangible assets
    
    
    6,619,741
    
    
    
    6,524,781Total assets
    
    $
    82,338,523
    
    
    $
    80,331,700LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    5,272,795
    
    
    $
    4,129,171Accrued expenses and other liabilities
    
    
    11,062,373
    
    
    
    9,877,253Current portion of long-term debt
    
    
    240,000
    
    
    
    735,000Deferred revenue, current
    
    
    923,853
    
    
    
    1,062,288Income taxes payable
    
    
    129,187
    
    
    
    Total current liabilities
    
    
    17,628,208
    
    
    
    15,803,712Deferred revenue
    
    
    376,107
    
    
    
    395,881Long-term debt, less current portion
    
    
    3,875,452
    
    
    
    8,971,923Other liabilities
    
    
    284,749
    
    
    
    Total liabilities
    
    
    22,164,516
    
    
    
    25,171,516Commitments and contingencies (Note 8)Stockholders equity:Preferred stock, $0.0001 par value; 4,000,000
shares authorized; no shares issued and
outstanding at June 30, 2005 and December 31,
2004
    
    
    
    
    
    
    Common stock, $0.0001 par value; 50,000,000
shares authorized; 22,081,589 and 22,029,430
shares issued and outstanding at June 30, 2005
and December 31, 2004, respectively
    
    
    2,208
    
    
    
    2,203Additional paid-in capital
    
    
    53,248,781
    
    
    
    52,880,192Unearned stock-based compensation
    
    
    (137,857
    )
    
    
    (420,677
    )Retained earnings
    
    
    8,587,547
    
    
    
    3,514,811Accumulated other comprehensive loss
    
    
    (1,526,672
    )
    
    
    (816,345
    )Total stockholders equity
    
    
    60,174,007
    
    
    
    55,160,184Total liabilities and stockholders equity
    
    $
    82,338,523
    
    
    $
    80,331,700
  3




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##### Table of Contents



STRATAGENE CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED INCOME STATEMENTS
(unaudited)
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Revenues
    
    $
    24,891,395
    
    
    $
    19,746,529
    
    
    $
    49,491,435
    
    
    $
    39,168,551Costs and expenses:Cost of products sold
    
    
    8,693,241
    
    
    
    7,125,210
    
    
    
    17,159,269
    
    
    
    13,050,795Research and development
    
    
    2,860,652
    
    
    
    2,811,237
    
    
    
    5,749,262
    
    
    
    5,331,850Selling and marketing
    
    
    5,420,910
    
    
    
    4,269,205
    
    
    
    10,413,616
    
    
    
    8,323,668General and administrative
    
    
    4,932,163
    
    
    
    5,469,654
    
    
    
    9,038,550
    
    
    
    8,563,521Impairment of long-lived assets
    
    
    
    
    
    
    6,893
    
    
    
    20,025
    
    
    
    58,131Total costs and expenses
    
    
    21,906,966
    
    
    
    19,682,199
    
    
    
    42,380,722
    
    
    
    35,327,965Income from operations
    
    
    2,984,429
    
    
    
    64,330
    
    
    
    7,110,713
    
    
    
    3,840,586Other income and expenses:Income (loss) on foreign currency
transactions
    
    
    (4,722
    )
    
    
    46,051
    
    
    
    (118,572
    )
    
    
    (83,250
    )Equity in earnings of joint venture
    
    
    
    
    
    
    1,785,822
    
    
    
    
    
    
    
    1,761,608Other income (expense), net
    
    
    (20,084
    )
    
    
    (1,417
    )
    
    
    512,623
    
    
    
    83,345Interest expense
    
    
    (58,909
    )
    
    
    (497,514
    )
    
    
    (157,952
    )
    
    
    (1,191,287
    )Interest income
    
    
    3,962
    
    
    
    48,565
    
    
    
    9,083
    
    
    
    116,043Total other income (expense)
    
    
    (79,753
    )
    
    
    1,381,507
    
    
    
    245,182
    
    
    
    686,459Income before income taxes
    
    
    2,904,676
    
    
    
    1,445,837
    
    
    
    7,355,895
    
    
    
    4,527,045Income tax (expense) benefit
    
    
    (767,232
    )
    
    
    13,440
    
    
    
    (2,283,159
    )
    
    
    (993,856
    )Net income
    
    $
    2,137,444
    
    
    $
    1,459,277
    
    
    $
    5,072,736
    
    
    $
    3,533,189Earnings per share:Basic
    
    $
    0.10
    
    
    $
    0.08
    
    
    $
    0.23
    
    
    $
    0.21Diluted
    
    $
    0.10
    
    
    $
    0.08
    
    
    $
    0.23
    
    
    $
    0.21Weighted average shares:Basic
    
    
    22,056,129
    
    
    
    17,581,384
    
    
    
    22,043,800
    
    
    
    16,607,026Diluted
    
    
    22,230,127
    
    
    
    17,655,091
    
    
    
    22,170,835
    
    
    
    16,639,932
  4




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STRATAGENE CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 Six Months EndedJune 30,2005
    
    2004Cash flows from operating activities:Net income
    
    $
    5,072,736
    
    
    $
    3,533,189Adjustments to reconcile net income to net cash provided
by operating activities:Equity in (income) of joint venture
    
    
    
    
    
    
    (1,761,608
    )Depreciation and amortization
    
    
    1,857,496
    
    
    
    1,347,191Impairment of long-lived assets
    
    
    20,025
    
    
    
    58,131Stock-based compensation
    
    
    338,688
    
    
    
    449,522Bad debt expense
    
    
    (154,448
    )
    
    
    (155,132
    )Excess and obsolete inventory expense
    
    
    326,238
    
    
    
    233,049Loss on disposal of assets
    
    
    4,531
    
    
    
    Interest accrued on notes receivable from stockholders
    
    
    
    
    
    
    (81,488
    )Accretion of interest on long-term debt
    
    
    
    
    
    
    740,842Deferred income taxes
    
    
    16,827
    
    
    
    (691,435
    )Changes in assets and liabilities:Foreign currency exchange contracts
    
    
    
    
    
    
    (46,958
    )Accounts receivable
    
    
    (886,567
    )
    
    
    396,978Inventories
    
    
    (1,479,219
    )
    
    
    (60,643
    )Prepaid expenses and other current assets
    
    
    (1,085,574
    )
    
    
    1,026,956Due from related party
    
    
    
    
    
    
    44,523Due to related party
    
    
    
    
    
    
    1,401,340Income taxes receivable
    
    
    
    
    
    
    (15,283
    )Other assets
    
    
    (29,140
    )
    
    
    166,683Accounts payable
    
    
    1,373,830
    
    
    
    (917,901
    )Accrued expenses and other liabilities
    
    
    1,261,265
    
    
    
    (1,223,098
    )Deferred revenue
    
    
    (123,122
    )
    
    
    (206,990
    )Other liabilities
    
    
    284,754
    
    
    
    Income taxes payable
    
    
    242,215
    
    
    
    133,673Net cash provided by operating activities
    
    
    7,040,535
    
    
    
    4,371,541Cash flows from investing activities:Cash acquired in merger, net of acquisition costs
    
    
    
    
    
    
    4,520,153Proceeds from maturities of marketable debt securities
    
    
    130,000
    
    
    
    Purchases of property and equipment
    
    
    (816,927
    )
    
    
    (395,978
    )Additions to intangible assets
    
    
    (749,012
    )
    
    
    (684,611
    )Redemption of BCH member interests
    
    
    
    
    
    
    (7,378
    )Changes in restricted cash
    
    
    511,210
    
    
    
    435,174Cash distributions from joint venture
    
    
    
    
    
    
    1,000,000Net cash (used in) provided by investing activities
    
    
    (924,729
    )
    
    
    4,867,360
 (Continued)
 5




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STRATAGENE CORPORATION AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 Six Months EndedJune 30,2005
    
    2004Cash flows from financing activities:Principal payments on long-term debt
    
    
    (735,000
    )
    
    
    (17,340,806
    )Issuance of long-term debt
    
    
    
    
    
    
    6,000,000Borrowings under line of credit
    
    
    45,957
    
    
    
    8,128,953Payments under line of credit
    
    
    (4,902,429
    )
    
    
    Distributions to BCH members
    
    
    
    
    
    
    (476,280
    )Proceeds from issuance of common stock
    
    
    289,992
    
    
    
    Net cash used in financing activities
    
    
    (5,301,480
    )
    
    
    (3,688,133
    )Effects of foreign currency exchange rates on cash
    
    
    (93,618
    )
    
    
    54,130Net increase in cash
    
    
    720,708
    
    
    
    5,604,898Cash at beginning of period
    
    
    4,890,458
    
    
    
    2,003,762Cash at end of period
    
    $
    5,611,166
    
    
    $
    7,608,660Supplemental disclosure of cash flow information:Cash paid during the period for:Interest
    
    $
    113,030
    
    
    $
    394,746Income taxes
    
    $
    1,858,500
    
    
    $
    1,065,580Non-cash
investing and financing activities:Shares of common stock issued in exchange for the outstanding shares of Hycor
and fair value of $3,331,223 assigned to the Hycor options assumed
    
    $
    
    
    
    $
    43,972,844Shares of common stock issued with respect to the conversion of outstanding debt
    
    $
    
    
    
    $
    9,180,000Redemption of common stock for outstanding notes receivable from stockholder
    
    $
    
    
    
    $
    (2,899,181
    )Redemption of common stock for outstanding note receivable from stockholder
    
    $
    
    
    
    $
    (276,878
    )Common stock issued in cashless exercises
    
    $
    
    
    
    $
    15Deferred taxes recorded in connection with BCH asset purchase
    
    $
    
    
    
    $
    750,000
 (Concluded)
  6




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STRATAGENE CORPORATION AND SUBSIDIARIES
 
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
 1. Basis of Presentation
       7




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##### Table of Contents



2. Proforma Financial Information
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,
    
    June 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004(pro forma)
    
    
    
    
    
    (pro forma)Revenues
    
    $
    24,891,395
    
    
    $
    23,244,240
    
    
    $
    49,491,435
    
    
    $
    48,135,084Net income
    
    $
    2,137,444
    
    
    $
    2,073,109
    
    
    $
    5,072,736
    
    
    $
    4,810,746Earnings per share:Basic
    
    $
    0.10
    
    
    $
    0.09
    
    
    $
    0.23
    
    
    $
    0.22Diluted
    
    $
    0.10
    
    
    $
    0.09
    
    
    $
    0.23
    
    
    $
    0.22Weighted average shares:Basic
    
    
    22,056,129
    
    
    
    21,880,045
    
    
    
    22,043,800
    
    
    
    21,852,158Diluted
    
    
    22,230,127
    
    
    
    22,184,693
    
    
    
    22,170,835
    
    
    
    22,139,438
  
    
    removing interest income on shareholder loans that were paid off upon the closing of
the merger;
    
    removing interest expense on subordinated debt that converted to common stock upon
the closing of the merger;
    
    recording amortization expense on acquired other intangible assets;
    
    recording amortization expense on unearned stock-based compensation for assumed stock options;
    
    reducing the CEOs salary pursuant to a new employment agreement effective on the merger date;
    
    removing Hycors merger related costs incurred in the periods presented; and
    
    recording the tax provision adjustment to the pro forma statement of operations at
the statutory rate of 36%.
 3. Earnings Per Share (EPS)
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,
    
    June 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Weighted average shares:Basic
    
    
    22,056,129
    
    
    
    17,581,384
    
    
    
    22,043,800
    
    
    
    16,607,026Effect of dilutive common stock options
    
    
    173,998
    
    
    
    73,707
    
    
    
    127,035
    
    
    
    32,906Diluted
    
    
    22,230,127
    
    
    
    17,655,091
    
    
    
    22,170,835
    
    
    
    16,639,932
  8




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4. Accounting for Stock-Based Compensation
 Accounting for Stock Issued to Employees, Accounting for
Certain Transactions Involving Stock Compensation.
 Accounting for Stock-based Compensation Accounting for Stock Appreciation Rights and Other Variable Stock
Option and Award Plans
 2005
    
    2004Risk free interest rate
    
    
    3.7
    %
    
    
    4.0
    %Dividend yield
    
    
    0
    %
    
    
    0
    %Volatility factor
    
    
    45
    %
    
    
    45
    %Expected life (in years)
    
    3 - 6 years
    
    3 - 6 yearsWeighted average fair value
    
    $
    3.35
    
    
    $
    3.69
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,
    
    June 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Net income as reported
    
    $
    2,137,444
    
    
    $
    1,459,277
    
    
    $
    5,072,736
    
    
    $
    3,533,189Stock-based employee
compensation expense
included in reported net
income, net of related tax
effects
    
    
    
    
    
    
    70,640
    
    
    
    
    
    
    
    93,530Stock-based compensation
expense determined under
SFAS No. 123 for all
awards, net of related tax
effects
    
    
    (49,407
    )
    
    
    (95,055
    )
    
    
    (2,146,512
    )
    
    
    (94,252
    )Pro forma net income
    
    $
    2,088,037
    
    
    $
    1,434,862
    
    
    $
    2,926,224
    
    
    $
    3,532,467Earnings per common share:Basic  as reported
    
    $
    0.10
    
    
    $
    0.08
    
    
    $
    0.23
    
    
    $
    0.21Basic  pro forma
    
    $
    0.09
    
    
    $
    0.08
    
    
    $
    0.13
    
    
    $
    0.21Diluted  as reported
    
    $
    0.10
    
    
    $
    0.08
    
    
    $
    0.23
    
    
    $
    0.21Diluted  pro forma
    
    $
    0.09
    
    
    $
    0.08
    
    
    $
    0.13
    
    
    $
    0.21
  9




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Share-Based Payment
 Accounting for Equity Instruments that are
Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services
 5. Balance Sheet Information
 Inventories
  June 30,
    
    December 31,2005
    
    2004Raw materials and supplies
    
    $
    4,864,752
    
    
    $
    5,710,213Work-in-process
    
    
    3,863,039
    
    
    
    3,067,593Finished goods
    
    
    5,174,803
    
    
    
    4,209,104Total
    
    $
    13,902,594
    
    
    $
    12,986,910
 Intangible Assets and Goodwill
  June 30, 2005
    
    December 31, 2004Useful Life
    
    
    
    
    
    Accumulated
    
    Net Book
    
    
    
    
    
    Accumulated
    
    Net Book(Years)
    
    Gross
    
    Amortization
    
    Value
    
    Gross
    
    Amortization
    
    ValueIntangible assets subject to
amortization:Amortizable patents and other
    
    2  7 years
    
    $
    8,032,095
    
    
    $
    3,801,637
    
    
    $
    4,230,458
    
    
    $
    7,303,757
    
    
    $
    3,324,128
    
    
    $
    3,979,629Amortizable intangible assets
    
    1  5 years
    
    $
    1,189,000
    
    
    $
    374,717
    
    
    $
    814,283
    
    
    $
    1,189,000
    
    
    $
    218,848
    
    
    $
    970,152Intangible assets not subject to
amortization:Non-amortizable intangible assets
    
    
    
    
    
    $
    1,575,000
    
    
    $
    
    
    
    $
    1,575,000
    
    
    $
    1,575,000
    
    
    $
    
    
    
    $
    1,575,000Goodwill
    
    
    
    
    
    $
    27,234,214
    
    
    $
    
    
    
    $
    27,234,214
    
    
    $
    27,234,214
    
    
    $
    
    
    
    $
    27,234,214$
    38,030,309
    
    
    $
    4,176,354
    
    
    $
    33,853,955
    
    
    $
    37,301,971
    
    
    $
    3,542,976
    
    
    $
    33,758,995
  10




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Accrued Expenses and Other Liabilities
  June 30,
    
    December 31,2005
    
    2004Accrued compensation
    
    $
    2,903,954
    
    
    $
    3,008,605Accrued royalties
    
    
    5,970,350
    
    
    
    4,825,246Warranty
    
    
    245,567
    
    
    
    333,277Other accrued expenses and liabilities
    
    
    1,942,502
    
    
    
    1,710,125Total
    
    $
    11,062,373
    
    
    $
    9,877,253
 6. Stockholders Equity
  Additional
    
    Unearned
    
    
    
    
    
    Accumulated Other
    
    TotalCommon Stock
    
    Paid-in
    
    Stock-based
    
    Retained
    
    Comprehensive
    
    StockholdersShares
    
    Amount
    
    Capital
    
    Compensation
    
    Earnings
    
    Loss
    
    EquityBalance as of January 1, 2005
    
    
    22,029,430
    
    
    $
    2,203
    
    
    $
    52,880,192
    
    
    $
    (420,677
    )
    
    $
    3,514,811
    
    
    $
    (816,345
    )
    
    $
    55,160,184Amortization of unvested
options acquired in the
Hycor merger
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    239,822
    
    
    
    
    
    
    
    
    
    
    
    239,822Adjustment to stock-based
compensation for terminated
employees
    
    
    
    
    
    
    
    
    
    
    (42,998
    )
    
    
    42,998
    
    
    
    
    
    
    
    
    
    
    
    Common stock issued for
employee stock purchase plan
    
    
    24,146
    
    
    
    2
    
    
    
    168,440
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    168,442Common stock issued upon
exercise of stock options
    
    
    28,013
    
    
    
    3
    
    
    
    121,545
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    121,548Tax benefit received from
the exercise of stock
options
    
    
    
    
    
    
    
    
    
    
    22,736
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,736Compensation expense for
non-employee stock options
    
    
    
    
    
    
    
    
    
    
    98,866
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    98,866Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,072,736
    
    
    
    
    
    
    
    5,072,736Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (709,962
    )
    
    
    (709,962
    )Unrealized gain on securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (365
    )
    
    
    (365
    )Balance as of June 30, 2005
    
    
    22,081,589
    
    
    $
    2,208
    
    
    $
    53,248,781
    
    
    $
    (137,857
    )
    
    $
    8,587,547
    
    
    $
    (1,526,672
    )
    
    $
    60,174,007
 7. Comprehensive Income
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,
    
    June 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Net income
    
    $
    2,137,444
    
    
    $
    1,459,277
    
    
    $
    5,072,736
    
    
    $
    3,533,189Foreign currency translation loss
    
    
    (454,980
    )
    
    
    (302,978
    )
    
    
    (709,962
    )
    
    
    (341,864
    )Unrealized gains on marketable debt securities
    
    
    119
    
    
    
    733
    
    
    
    (365
    )
    
    
    733Comprehensive income, net of tax
    
    $
    1,682,583
    
    
    $
    1,157,032
    
    
    $
    4,362,409
    
    
    $
    3,192,058
 11




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8. Commitments and Contingencies
 Royalty Payments 
 Legal
 Invitrogen Corporation
  E. coli
 12




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##### Table of Contents



Takara Bio
  Third Wave Technologies
  ®
 Applera Corporation
   13




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##### Table of Contents



Ariadne Genomics
  Other Legal Matters
  9. New Accounting Pronouncements
 Share-Based Payment Accounting for Stock-Based Compensation Accounting for
Stock Issued to Employees
 Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on
Qualified Production Activities Provided by the American Jobs Creation Act of 2004,
 Accounting and Disclosure Guidance
for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004,
 14




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##### Table of Contents



10. Segment Information
  Three Months Ended
    
    Three Months EndedJune 30, 2005
    
    June 30, 2004Research
    
    Medical
    
    
    
    
    
    Research
    
    MedicalSupplies
    
    Diagnostics
    
    Total
    
    Supplies
    
    Diagnostics
    
    TotalProduct sales from external customers
    
    $
    18,589,728
    
    
    $
    6,301,667
    
    
    $
    24,891,395
    
    
    $
    17,653,540
    
    
    $
    2,092,989
    
    
    $
    19,746,529Income before income taxes
    
    $
    1,165,781
    
    
    $
    1,738,895
    
    
    $
    2,904,676
    
    
    $
    829,677
    
    
    $
    616,160
    
    
    $
    1,445,837
 Six Months Ended
    
    Six Months EndedJune 30, 2005
    
    June 30, 2004Research
    
    Medical
    
    
    
    
    
    Research
    
    MedicalSupplies
    
    Diagnostics
    
    Total
    
    Supplies
    
    Diagnostics
    
    TotalProduct sales from external customers
    
    $
    37,500,848
    
    
    $
    11,990,587
    
    
    $
    49,491,435
    
    
    $
    37,075,562
    
    
    $
    2,092,989
    
    
    $
    39,168,551Income before income taxes
    
    $
    4,220,908
    
    
    $
    3,134,987
    
    
    $
    7,355,895
    
    
    $
    3,910,884
    
    
    $
    616,160
    
    
    $
    4,527,044
  June 30, 2005
    
    December 31, 2004Research
    
    Medical
    
    
    
    
    
    Research
    
    MedicalSupplies
    
    Diagnostics
    
    Total
    
    Supplies
    
    Diagnostics
    
    TotalTotal assets
    
    $
    40,843,378
    
    
    $
    41,495,145
    
    
    $
    82,338,523
    
    
    $
    38,202,779
    
    
    $
    42,128,921
    
    
    $
    80,331,700
 15




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 The following information should be read in conjunction with the financial statements and the
related notes included in Item 1 of Part I of this Quarterly Report on Form 10-Q and with the
financial statements and related notes included in the Companys Annual Report on Form 10-K for the
year ended December 31, 2004. The financial information for Stratagene includes the accounts and
balances of Stratagene Corporation and subsidiaries on a consolidated basis, and includes the
results of operations of Hycor Biomedical Inc. and subsidiaries since Stratagenes acquisition of
Hycor on June 2, 2004.
 This Managements Discussion and Analysis of Financial Condition and Results of Operations
and other sections of this Quarterly Report on Form 10-Q contain forward-looking statements and
include assumptions concerning the Companys operations, future results and prospects. These
forward-looking statements are based on current expectations and are subject to a number of risks,
uncertainties and other factors. The Companys actual results could differ materially from those
expressed in or implied by these forward-looking statements as a result of various factors,
including those set forth below under the caption Factors that May Affect Future Results.
 Overview
   Merger with Hycor
  BCH Asset Acquisition
   16




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Basis of Presentation
   Critical Accounting Policies and Estimates
  Use of Estimates
  Revenue Recognition
 Revenue Recognition, Software Revenue Recognition
 17




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Type of deferred revenue
    
    When recognizedExtended warranty or maintenance agreements
    
    Recognized over the term of the contract, generally 12
months. In
most cases, these contracts were sold at the time of product
purchase and the recognition of revenue begins after the
warranty
period, which is generally one year.License agreements
    
    Recognized over the term of the agreement, generally 12
months.
  June 30,
    
    December 31,Type of deferred revenue
    
    2005
    
    2004Extended warranty, installation or maintenance agreement
    
    
    48
    %
    
    
    49
    %License agreements
    
    
    52
    %
    
    
    51
    %Total deferred revenue
    
    
    100
    %
    
    
    100
    %
 Accounts Receivable
  Inventories
   18




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##### Table of Contents



Deferred Taxes
 Accounting for Income Taxes
 Long-lived Assets
 Goodwill and Intangibles, Accounting for the Impairment or Disposal of Long-Lived
Assets.
 Royalties
  Warranties
  Research and Development
  19




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Results of Operations
 Three months ended June 30, 2005 compared to three months ended June 30, 2004
 Revenues
   Gross Profit
  Research and Development Expenses
  20




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##### Table of Contents



Selling and Marketing Expenses
  General and Administrative Expenses
  Total Other Income (Expense), Net
  Income Taxes
  21




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##### Table of Contents



Six months ended June 30, 2005 compared to six months ended June 30, 2004
 Revenues
  Gross Profit
  Research and Development Expenses
  Selling and Marketing Expenses
  22




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##### Table of Contents



General and Administrative Expenses
  Total Other Income (Expense), Net
  Income Taxes
   23




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Liquidity and Capital Resources
            24




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##### Table of Contents



Payment Due by PeriodLess than
    
    1-3
    
    4-5
    
    After 5Contractual Obligations
    
    Total
    
    1 Year
    
    Years
    
    Years
    
    YearsOperating leases
    
    $
    6,687,753
    
    
    $
    2,107,937
    
    
    $
    4,579,816
    
    
    
    
    
    
    
    Principal on long-term debt (1)
    
    
    9,706,923
    
    
    
    735,000
    
    
    
    5,676,923
    
    
    $
    480,000
    
    
    $
    2,815,000Employment agreements
    
    
    1,358,753
    
    
    
    630,835
    
    
    
    727,918
    
    
    
    
    
    
    
    Other purchase commitments
    
    
    3,130,000
    
    
    
    3,130,000
    
    
    
    
    
    
    
    
    
    
    
    Total contractual obligations
    
    $
    20,883,429
    
    
    $
    6,603,772
    
    
    $
    10,984,657
    
    
    $
    480,000
    
    
    $
    2,815,000
 
 (1)
    
    At June 30, 2005, total long-term debt was $4.1 million due to principal payments made during
the first have of fiscal 2005. Off-Balance Sheet Arrangements
  25




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Other Commitments and Contingencies
  New Accounting Pronouncements
  Cautionary Note Regarding Forward-Looking Statements
   Factors that May Affect Future Results
  26




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##### Table of Contents



Stratagenes future success depends on the timely introduction of new products and the
acceptance of these new products in the marketplace.
    
    
    availability, quality and price relative to competitive products;
    
    the timing of introduction of the product relative to competitive products;
    
    customers opinions of the products utility;
    
    citation of the product in published research; and
    
    general trends in life sciences and medical diagnostics research.
 The markets for Stratagenes products are extremely competitive and subject to rapid
technological change and if Stratagene fails to compete effectively, its business may suffer.
  
    
    product performance, features and reliability;
    
    price;
    
    timing of product introductions;
    
    ability to develop, maintain and protect proprietary products and technologies;
    
    sales and distribution capabilities;
    
    technical support and service; and
    
    breadth of product line.
   27




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If Stratagenes existing license agreements are terminated, Stratagene may be prevented from
selling some of its products.
     Because Stratagenes quarterly revenue and operating results may vary significantly in future
periods, its stock price may decline.
  28




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##### Table of Contents



Stratagenes founder, chairman of its board of directors, chief executive officer and
president exerts considerable control over it.
  Stratagene depends substantially on key employees, and the loss of the services of any of its
key employees or the failure to hire qualified employees could seriously damage Stratagenes
business.
   Stratagenes indebtedness could limit its ability to operate its business, obtain additional
financing and pursue other business opportunities.
  
    
    Stratagene will need a portion of its cash flow to pay the principal and interest on its
indebtedness, including indebtedness it may incur in the future;
    
    payments of Stratagenes indebtedness will reduce the funds that would otherwise be
available for its operations and future business opportunities;
    
    Stratagene may have greater relative debt burdens than its competitors, which may place
Stratagene at a competitive disadvantage;
    
    Stratagenes debt level may make it more vulnerable than its competitors to a downturn in
its business or the economy generally; and
    
    there would be a material adverse effect on Stratagenes business and financial condition
if Stratagene is unable to service its indebtedness or obtain additional financing.
 29




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##### Table of Contents



Stratagene may not have financing for future capital requirements, which may prevent it from
addressing gaps in its product offerings or improving its technology.
   
    
    for research and development to successfully develop additional products;
    
    to file and prosecute patent applications and defend and assert patents to protect its technology;
    
    to retain qualified employees, particularly in light of intense competition for qualified scientists;
    
    to manufacture additional products itself or through third parties; and
    
    to acquire new technologies, products or companies.
  Inability to secure and maintain intellectual property protection for its products and
technologies could adversely affect Stratagenes ability to compete.
     30




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##### Table of Contents



Intellectual property litigation could seriously harm Stratagenes business.
     Stratagene may spend resources on research and development projects without being able to
achieve an adequate return, if any, on its investment.
  If Stratagene fails to manage its growth effectively, its business could suffer.
  31




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If Stratagene is unable to implement and maintain effective internal control over financial
reporting, its stock price could be adversely affected.
     32




---



##### Table of Contents



The price of the Stratagene common stock is expected to be volatile.
  
    
    quarterly fluctuations in Stratagenes operating and earnings per share results;
    
    technological innovations or new product introductions by Stratagene or its competitors;
    
    delays in the development and introduction of new products;
    
    disputes concerning patents, licenses or other proprietary rights;
    
    changes in earnings estimates by equity and market research analysts;
    
    sales of common stock by existing stockholders;
    
    loss of key personnel; and
    
    securities class actions or other litigation affecting Stratagene or other companies in its industry.
  Future sales of currently outstanding shares of Stratagene common stock could adversely affect
Stratagenes stock price.
   Reductions in research and development budgets or government funding may impact Stratagenes
sales.
  33




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##### Table of Contents



Failure to license new technologies could impair Stratagenes new product development.
    Stratagene may acquire other businesses or form joint ventures that could decrease its
profitability, dilute your ownership in Stratagene, increase its debt or cause Stratagene to incur
significant expense.
  34




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##### Table of Contents



Changes in distribution and purchasing methods by Stratagenes customers may force it to use
more expensive marketing and distribution channels.
   Stratagene relies on third party manufacturers for raw materials and product components.
  
    
    an inability to obtain an adequate supply of required components due to manufacturing
capacity constraints, the discontinuance of a product by a third-party manufacturer, an
acquisition of the manufacturer by one of Stratagenes competitors or other supply
constraints;
    
    delays and long lead times in receiving materials from vendors; and
    
    reduced control over quality and pricing of components.
  Adverse developments affecting Stratagenes international operations or foreign currency
fluctuations could harm its results from operations.
  35




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##### Table of Contents




    
    difficulties and costs associated with staffing and managing foreign operations;
    
    unexpected changes in regulatory requirements;
    
    the difficulties of compliance with a wide variety of foreign laws and regulations;
    
    more limited protection for intellectual property rights in some countries;
    
    changes in Stratagenes international distribution network and direct sales force;
    
    potential trade restrictions and exchange controls;
    
    import and export licensing requirements;
    
    longer accounts receivable collection cycles in certain foreign countries; and
    
    potential increased costs associated with overlapping tax structures.
  Stratagenes activities involve hazardous materials and may subject it to costly environmental
liability.
  Interruptions in its manufacturing operations could adversely impact Stratagenes ability to
effectively operate its business.
  36




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##### Table of Contents



If its biological products and instruments are not properly produced or manufactured,
Stratagene could incur substantial unexpected expenses, experience product returns and suffer
damage to its brand and reputation.
  If Stratagenes access to necessary tissue samples is restricted or ethical concerns
surrounding the use of genetic information become widespread, its business could suffer.
  Anti-takeover provisions of Stratagenes certificate of incorporation and bylaws and
provisions of Delaware law could delay or prevent a change of control that you may favor.
    
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
  Foreign Currency Translation/Transaction
   37




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##### Table of Contents



Derivative Financial Instruments
 Accounting for Derivative Instruments and Hedging Activities,
  Fair Value of Financial Instruments
  Interest Rates
   Average Interest Rate for
    
    Average Interest Rate forthe Three Months Ended
    
    the Six Months EndedLong-term Debt Obligations
    
    June 30, 2005
    
    June 30, 2005Reducing revolving line of credit
    
    
    5.7
    %
    
    
    5.4
    %Industrial revenue bonds
    
    
    2.8
    %
    
    
    2.4
    %
  38




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##### Table of Contents



Item 4. Controls and Procedures
   Changes in Internal Control
     39




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##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 4. Submission of Matters to a Vote of Security Holders
   Votes AgainstVotes For
    
    or WithheldJoseph A. Sorge, M.D.
    
    
    21,448,813
    
    
    
    190,757J. David Tholen
    
    
    21,436,239
    
    
    
    203,331Robert C. Manion
    
    
    21,486,165
    
    
    
    153,405Carlton J. Eibl
    
    
    21,496,751
    
    
    
    142,819John C. Reed
    
    
    21,512,699
    
    
    
    126,871
  
 Item 6. Exhibits
 ExhibitNumber
    
    Description31.1
    
    Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002.**32.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002.**
 
 **
    
    These certifications are being furnished solely to accompany this quarterly
report pursuant to 18 U.S.C. Section 1350, and are not being filed for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended, and are not to be
incorporated by reference into any filing of the Company, whether made before or after
the date hereof, regardless of any general incorporation language in such filing. 40




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##### Table of Contents



SIGNATURES
  STRATAGENE CORPORATIONDate: August 12, 2005
    By:
    /s/ Joseph A. Sorge, M.D.Joseph A. Sorge, M.D.Chairman of the Board, Chief Executive
Officer and President
(Principal Executive Officer) Date: August 12, 2005
    By:
    /s/ Steve R. MartinSteve R. MartinVice President and Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer) 41